What Is a Cash Investment?
A cash investment is a short-term obligation, usually fewer than 90 days, that provides a return in the form of interest payments. Cash investments generally offer a low return compared to other investments. They may also have very low levels of risk, in addition to being insured by the Federal Deposit Insurance Corporation (FDIC).
A cash investment also refers to an individual’s or business's direct financial contribution to a venture, as opposed to borrowed money.
Key Takeaways
- A cash investment is a short-term obligation, usually fewer than 90 days, that provides a return in the form of interest payments.
- Investors that are looking for a safe investment and looking to preserve their capital will opt for secure investment vehicles, such as cash investments.
- Cash investments are usually undertaken by investors who need a temporary place to keep their cash while researching other investment products.
- Money market accounts (MMAs) and certificates of deposit (CDs) are examples of cash investments.
Understanding Cash Investments
Investors that are looking for a safe investment and looking to preserve their capital will opt for secure investment vehicles, such as cash investments. Money market accounts (MMAs) and certificates of deposit (CDs) are examples of cash investments. The choice of which of these cash investments that you opt for depends on whether the investor wants to lock in a certain yield or you require FDIC insurance.
Cash investments are usually undertaken by investors who need a temporary place to keep their cash while researching other investment products. Investors benefit from the low-risk yield and high liquidity of cash investments. Although interest rates are low and a favorable interest rate can only be locked in temporarily, an investor can have access to their money within a short period of time.
In the credit industry, lenders typically require borrowers to have “skin in the game,” especially for large loans. In real estate, for example, a property buyer who takes out a mortgage is expected to make a cash investment in the form of a down payment. The borrower's cash investment lowers the lender's risk since the borrower will have something of his own to lose if he defaults on the mortgage. If the borrower's cash investment is less than 20%, the lender will require the borrower to purchase private mortgage insurance (PMI) to protect the lender's interests.
Types of Cash Investments
Savings Account
Some people consider a savings account as an investment alternative for cash. Money held in the account is insured by the FDIC. However, the interest rate on these accounts is minimal. The average interest return on a savings account is only 0.09%. Investors that want the option to access their money any time—but also require a slightly higher rate of return—typically will put their cash in a high yield savings account, offered through local banks.
Money Market
This is a very short-term security that usually has a maturity of fewer than six months. They are very liquid investments that pay variable interest rates. Money market accounts generally have a slightly higher interest rate return than a cash savings account. Examples of money market instruments include commercial paper and Treasury bills.
Certificate of Deposit (CD)
A CD functions like a bond in that it makes periodic interest payments to investors and funds are held for a predetermined period of time. But unlike bonds that can be sold prior to the maturity date, funds in a CD are locked in if held with a bank. Withdrawing the money will incur a penalty, however, this is not the case for CDs held with a brokerage which permits selling on the secondary markets prior to maturity. The funds in a CD vehicle are insured by the FDIC up to $100,000.
